Introduction
A recurring concern we hear from managers running foreign-invested (FDI) companies in Vietnam goes something like this: “Before we realized it, our local staff salaries had drifted well above the market rate.” Year after year, raises are granted as a matter of course. Then one day, when the company tries to hire someone new for the same role, leadership is taken aback by how wide the internal pay gap has become. We have seen this scenario repeat itself across many client situations.
The problem hits accounting roles particularly hard. Positions like Chief Accountant (Kế toán trưởng) carry high specialization and are not easy to replace, which makes it tempting to keep raising salaries to retain incumbents. On top of this, Vietnam’s Labor Code (Bộ luật Lao động 2019) has some distinctive rules around employment contract term and renewal count. Managers who are unaware of these rules often miss the very moments when the salary structure could have been reset.
This article walks through the structural reasons salaries tend to drift upward in Vietnam, explains how the labor contract term and renewal rules interact with this problem, and offers practical countermeasures that managers can apply.
1. Why Salaries Drift Upward in Vietnam
Salary creep in Vietnam is rarely the result of a single bad decision. More often, it emerges from a combination of customary practice, legal constraints, and human psychology — a trap that companies can fall into almost without noticing.
Annual raises have become a default expectation
Vietnam has experienced sustained inflation over many years, and the expectation of a yearly raise is firmly embedded in the labor market. Most foreign-invested companies follow an annual review cycle, often awarding a “cost-of-living” adjustment that runs above the consumer price index, regardless of business performance or individual evaluation.
The issue is that these raises are not strongly tied to performance, so over time the gap between internal salaries and the external market widens. An accountant hired at VND 20 million per month will reach roughly VND 28 million after five years of 7% annual raises, and approximately VND 39 million after ten years. Meanwhile, the market rate for the same role tends to move much more slowly, leaving a growing premium baked into long-tenured staff.
The “don’t lose them before Lunar New Year” reflex
The period around Lunar New Year (Tet / Tết Nguyên đán) is when Vietnamese employees most actively look at job changes. Many companies, anxious about losing staff right before Lunar New Year — or right after paying the 13th-month bonus — offer retention raises in late December or early January.
Raises offered under retention pressure are often higher than what the market would actually justify. Once granted, they are difficult to walk back, both psychologically and legally. The “we just needed to keep them this year” raise tends to remain embedded in the salary base for years afterward.
Once raised, salaries cannot be lowered
Under Vietnamese labor law, an employer cannot generally reduce an employee’s salary without their consent. The salary specified in the labor contract is a material term of the contract, and any unilateral reduction risks being treated as invalid.
In practice, bonus amounts can be adjusted when business slows, but reducing the base salary itself is extremely difficult. This “you cannot take it back” feature is the single biggest reason raises in Vietnam deserve more careful judgment than they often receive.
2. The Trap in Contract Term and Renewal Rules
Any conversation about salary creep eventually has to address Vietnam’s rules on labor contract term and renewal count. The Labor Code contains provisions that surprise many foreign managers and that determine when companies actually have a chance to reset the salary structure.
There are only two contract types
Under Article 20 of the 2019 Labor Code, Vietnam recognizes only two types of labor contracts:
| Contract type (English) | Contract type (Vietnamese) | Term |
| Definite-term labor contract | Hợp đồng lao động xác định thời hạn | Up to 36 months |
| Indefinite-term labor contract | Hợp đồng lao động không xác định thời hạn | No fixed term |
Note: The “seasonal contract” category (under 12 months) that existed prior to 2020 was abolished when the 2019 Labor Code took effect.
Definite-term contracts are capped at two — the third must be indefinite
This is the rule most often missed by FDI managers. Under Article 20(2) of the Labor Code, for ordinary Vietnamese employees, a definite-term contract may be signed at most “twice.” After the first definite-term contract expires, the parties may sign one more definite-term contract. But when that second contract expires, if the employee continues to work for the company, the relationship must convert to an indefinite-term contract.
The practical sequence looks like this:
1. First definite-term contract (e.g., 12 months) → expires
2. Second definite-term contract (e.g., 24 months) → expires
3. From the third onward, the contract must be indefinite-term
The legislative intent is to prevent companies from keeping workers in a perpetually unstable position by repeatedly signing short-term contracts. Many countries have similar rules in spirit; Vietnam’s distinctive feature is that the line is drawn by count of contracts, not by total years served, which means the conversion to indefinite-term tends to arrive earlier than managers expect.
Once indefinite, termination becomes much harder
Once a contract is indefinite-term, the employer can terminate the relationship only on the grounds enumerated in Article 36 of the Labor Code (serious employee misconduct, persistent underperformance, health-related incapacity, and a few other narrow categories). The convenient option of “the contract simply expired” is no longer available.
The practical consequences include:
– Underperforming staff cannot be easily exited.
– The natural moment to revisit salary levels — contract expiry — disappears.
Missing the second-contract expiry means losing the last natural opportunity to reset the entire employment package, salary included.
A real example: by the time we noticed, it was too late
One of our client cases involved a Vietnamese accountant who had been with a Japanese-affiliated company for five years. By the time leadership focused on the situation, two facts had become clear: the contract had quietly converted to indefinite-term, and the salary had reached roughly 1.5x the market rate for the same role.
The history was straightforward. A one-year contract on hire, then a two-year renewal, then an attempt to sign another two-year contract — at which point HR pointed out that the renewal would automatically be indefinite-term. Senior management had assumed that a third definite-term contract was still possible and had never treated it as a salary review milestone.
The company ended up retaining the employee, but later, when it tried to bring in a new accounting hire, the resulting structure — a junior new hire on a lower salary while a long-tenured staff member earned significantly more for similar work — forced a broader review of the entire compensation framework. From what we have seen, this category of issue tends to incubate quietly for several years before surfacing all at once.
3. Practical Countermeasures
Given the structural pattern described above, here are some measures we have seen work in practice.
Set salary bands and benchmark them annually
The most fundamental step is to establish a salary band (minimum to maximum) for each position, and to compare your bands against the market at least once a year. Several recruitment firms and research houses publish position-level salary surveys for Vietnam; using them as a reference for an annual band review is a manageable habit to build.
For staff who have reached the top of their band, an alternative is to reward performance through bonuses rather than base-salary increases. Because bonuses do not lock into next year’s base, this approach helps prevent base salaries from drifting above the market rate. One caveat worth noting: for variable bonuses to be deductible for corporate income tax purposes, the company generally needs to specify them in the labor contract or wage regulations and to document the calculation basis.
Of course, granting appropriate raises to strong performers is itself important. The problem is not raises per se, but raises that compound year after year as a matter of habit, without any reference to role, performance, or market rate.
Track contract types and renewal milestones centrally
Contract administration is not just an HR back-office task — it is information that managers and leadership should also be able to see. At minimum, we recommend keeping a single source of truth for:
– Each employee’s contract type (definite or indefinite) and term
– The expiry dates of the first and second definite-term contracts
– The point at which indefinite-term conversion would occur
– Salary increase history and the current salary level
In particular, three to six months before a second definite-term contract expires is the right time to convene a deliberate management discussion: do we want to retain this person, is the salary level still appropriate, and are we comfortable that the conversion to indefinite-term will be the right outcome?
Build a “pre-conversion review” into the process
The expiry of the second definite-term contract is the last natural opportunity to reset the employment relationship. A structured review at this point — covering performance, market positioning of the salary, role expectations, and the trajectory of future raises — gives the company a clear basis on which to proceed (or not) to indefinite-term status. If the company does proceed, it does so consciously, with an explicit view on how compensation should evolve afterward.
Treat accounting talent strategically
For accounting roles in particular, over-reliance on a single long-tenured employee is itself a risk. Long-tenured staff tend to accumulate institutional knowledge that becomes opaque to others, and their compensation tends to drift well above market. Periodic refreshment of the team and a deliberate look at organizational design are worth keeping on the agenda.
For finance and accounting talent specifically, regularly checking the balance between recruitment-market rates and internal compensation is critical. For Chief Accountants and other senior accounting roles, comparing against the external market is what sharpens the accuracy of hiring, placement, and raise decisions.
Closing Thoughts
Salary creep in Vietnam is the product of an annual raise culture, retention-driven raise decisions, and the legal reality that salaries cannot be reduced once granted. Layered on top of these is a contract term and renewal rule that, if overlooked, removes the most natural opportunities to step back and review compensation.
We hope this article prompts a fresh look at your company’s payroll trajectory and contract administration practices in Vietnam. Compensation and contract decisions made today shape the organization not only this year, but five and ten years out — and they deserve to be designed with that horizon in mind.
FAQ
Q1. Is it really impossible to reduce an employee’s salary in Vietnam once it has been raised?
A. With the employee’s written consent, a reduction is theoretically possible, but in practice it is extremely difficult. The salary specified in the labor contract is treated as a material contract term, and any unilateral reduction risks being deemed invalid. Adjusting bonuses is permitted both legally and operationally, but reducing the base salary itself should be regarded as a last resort.
Q2. Are there any cases where a third definite-term contract is allowed? What about foreign employees or executives?
A. For ordinary Vietnamese employees, Article 20 of the 2019 Labor Code requires the third contract onward to be indefinite-term. Foreign employees are treated differently: because the contract term cannot exceed the validity of the work permit, multiple definite-term contracts can be signed in line with the work permit’s issuance and renewal cycles. Some senior executive and special role categories also have specific exceptions, but for ordinary Vietnamese accounting and finance staff, the two-renewal rule applies.
Q3. Can we briefly terminate the employee just before the second contract expires and rehire them, to reset the renewal count?
A. Even if the contract is formally terminated, if the employment relationship is in substance continuous, this can be treated as an attempt to evade the labor law. Vietnamese authorities tend to look at substance over form, and similar arrangements have been struck down in past disputes. The very idea of “resetting the count” runs against the spirit of the law and is not an approach we would recommend.
